Farmers, Cooperatives Win Big With Last Minute Tax Change

A ninth inning change to the conference tax reform conference bill is a win for farmers and cooperatives. A small portion of the conference bill that many anticipate Congress will vote on today addresses a key issue left out of the initial language: Section 199. Also known as the Domestic Production Activities Deduction (DPAD), this portion of the tax code reduces taxes on proceeds from agricultural products marketed through cooperatives.

Late last week, The Washington Post reported the loss of Section 199 would cost dairy farmers an average of $100 per cow. Thanks to Sens. John Hoeven (R-ND), John Thune (R-SD), House Agriculture Chairman Mike Conaway (R-Texas) and the outcry of a variety of agricultural cooperatives from all sectors, the tax benefits of Section 199 were preserved in an amendment called Section 199A.

According to ProFarmer’s Washington Policy analyst, Jim Wiesemeyer, Sen. Hoeven announced that his amendment to maintain the fair tax treatment of cooperatives, which he authored with Sen. John Thune (R-S.D.), is included in the conference committee’s final tax relief package.

“We worked hard to ensure the final tax relief legislation provided certainty for cooperatives and treated them fairly,” Hoeven said. “Cooperatives provide vital services for our communities and agriculture producers and fill an important role in our economy. I appreciate Senator Thune, as well as our colleagues in the Senate and the House, for working with us to secure this important provision for our cooperatives. I look forward to advancing this and the rest of our tax relief legislation to help grow our economy and benefit middle-class Americans, workers, small businesses, farmers and ranchers.”

Cooperatives praised the amendment saying it was a win not only for them, but for their farmer members as well.

“America’s dairy farmers, who overwhelmingly rely on cooperatives to market their milk, appreciate the determined efforts by Sens. John Hoeven (R-ND) and John Thune (R-SD), as well as multiple House members, including Agriculture Committee Chairman Mike Conaway (R-TX), to seek a fair and reasonable solution to this challenge. Their efforts will help prevent a higher tax bill for cooperatives and avert the loss of economic activity in rural communities that these businesses help generate,” the National Milk Producers Federation said in a statement. “We’re also grateful for the numerous senators on both sides of the aisle who elevated this issue during the debate.”

Paul Neiffer, CPA and principal at accountancy CliftonLarsonAllen and author of the popular AgWeb.com blog The Farm CPA offers this example:

“If your income is under $315,000 (for married couples), there is no limit on this deduction. You essentially take your net farm income, multiply it by 20% and this is your extra deduction. However, once you go over this amount, a limitation on this deduction begins. It is the greater of 50% of wages paid (grain wages and kid wages do not count) by the farm operation or 25% of wages paid plus 2.5% of original cost of depreciable farm assets that are less than 10 years old (it is a little more complicated than this to calculate). As an example, assume a farm earns $500,000, pays wages of $125,000 and has original asset cost of $2.5 million. The gross 20% deduction is $100,000. It is limited to the greater of (1) $62,500 ($125,000 X 50%) or $93,750 ($125,000 X 25% plus $2.5 million X 2.5%). Therefore, the farmer could only deduct $93,750. This will require us to maintain a new depreciation schedule solely for calculating this deduction (there goes tax simplification).”

“There is no $315,000 limit on the 20% deduction. If your income is under this amount, the 50% of wages paid or 25% plus 2.5% of adjusted basis does not apply. There is also a special election for farmers to deduct 100% of business interest if their income is over $25 million. They have to use ADS on depreciable assets of 10 years or longer and no bonus depreciation.”

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